Hackett Group Inc (HCKT) 2007 Q2 法說會逐字稿

Good evening and welcome to the Answerthink second quarter earnings conference call. Your lines have been placed on a listen-only mode until the question-and-answer session. Please be advised that the conference is being recorded. Hosting tonight's call are Mr. Ted Fernandez, Chairman and CEO and Mr. Grant Fitzwilliam, Chief Financial Officer. Mr. Fitzwilliam you may begin.

Thank you, operator. Good evening, everyone. Thank you for joining us today to discuss Answerthink's second quarter results. Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of Answerthink and myself, Grant Fitzwilliam, CFO. A press announcement was released over the wires at 4:15 P.M. eastern time today. For a copy of the release, please visit our web site at www.answerthink.com. We will also place any additional financial or statistical data discussed on this call that is not contained in the release on the investor relations page of our web site. Before we begin, I would like to remind you that in the following comments and in the questions-and-answers session, we will be making statements about expected future results which may be forward-looking statements for the purposes of the Federal Securities Laws. These statements relate to our current expectations, estimates and projections and are not a guarantee of future performance. They involve risks, uncertainties and assumptions that are difficult to predict and which may not be accurate, actual results may vary. These forward-looking statements should be considered only in conjunction with the detailed information, particularly to the risk factors contained in our SEC filings. At this point, I would like to turn it over to Ted.

Thank you, Grant. I will start with my quarterly overview comments then ask Grant to comment on our operating results , cash flow and also cover outlook. Grant will turn it back over to me and I'll make some comments reviewing some of our strategic priorities. Then we'll open it up for Q&A. Let me start with the quarterly overview. Today we reported Q2 results with revenue exceeding our guidance and pro forma EPS on the high end of our guidance. As you will recall from our first quarter call, in early Q1, we changed the emphasis in our primary go-to-market strategy to ensure that we optimize client relationships and leads across all of our offerings. In order to do this, we introduced a new transformational benchmark that allows us to engage a client as strategically as possible at the onset of our relationship while fully exposing them to our proprietary benchmark efforts and best practice implementation content, which are at the heart of our membership advisory office. Another key change for 2007, was adjusting our sales incentive plans so that we reward the sale of all of our offerings equally. We also made the sale of our membership advisory programs a prerequisite for accelerator in club recognition.

Our goal in 2007 is to ensure that our non-membership advisory services grow at normalized growth rates while continuing to grow our advisory services as aggressively as possible. Based on our Q2 results and our Q3 guidance we believe these adjustments are resulting in higher Hackett group revenue growth and revenue per client and favorably impacting profitability. Specifically, our new transformational benchmark grew strong sequential growth in our benchmarking and transformation service line, which were up 20% sequentially with a very strong contribution from our European team and our membership advisory revenues grew as expected with improved sales and renewal activity. Additionally, REL was up sequentially instead of down slightly as originally expected when we provided the quarterly guidance. Relative to REL, we believe that reinstituting the REL dedicated sales channel in Q3 of last year is allowing us to continue to grow our backlog and pipeline for this business. We now expect for the sequential revenue growth in REL to further accelerate in Q3.

In our Best Practice Solutions group, if you recall in Q4, we completed the exit of our business applications low margin staff augmentation contracts in Lawson as well as in SAP. Sequentially, this group was up 8% with improved results in Oracle Hyperion as well as SAP. On the SG&A front, we took several cost reduction actions during Q1, which resulted in severance and other costs that totaled about a $0.01 in Q1, but were part of our plan to reduce our SG&A spend throughout 2007. We saw improved leverage in SG&A in Q2 and we expect this trend to continue for the balance of the year. Overall, the actions that we took at the beginning of the year are providing the momentum that we expected. Additionally, overall market demand remains healthy in the U.S. and is strong in Europe which bodes well for our growth prospects for the remainder of the year.

Let me now turn it over to Grant to provide details on our operating results, cash flow and also comment on

Thank you, Ted. I plan to cover four main topics. Firstly, overall second quarter results. Second, a breakdown of revenue. Third, key operating statistics and conclude with a discussion of our financial outlook for the third quarter of 2007. Note that all references to revenue in my discussion will pertain to gross revenue which includes revenue with reimbursable expenses. Q2 overall results. We are pleased to report revenues above our guidance which was 42 to $44 million and pro forma earnings per share at the high end of our quarterly guidance up $0.02 to $0.04. For the second quarter, our revenues were $45.5 million, a 14% sequential increase. Our pro forma net income totaled $1.8 million or $0.04 per share. Pro forma earnings exclude non-cash compensation of 1.1 million, intangible asset amortization of 348,000, 56,000 in professional fees from the UK misappropriation and assumes a normalized tax rate of 40%. On a GAAP basis for the second quarter, we had net income of $1.5 million or $0.03 per diluted share. This includes a tax expense in the quarter of $68,000. As of the end of the second quarter of 2007, the Company has approximately $70 million of U.S. Federal loss carried forward.

Breaking down revenue, total Hackett revenue was up 18% sequentially to $27.2 million compared to $22.9 million in the previous quarter and $25.6 million a year ago. Benchmarking and business transformation revenue was strong totaling $23.3 million up 21% sequentially and 4% on a year-over-year basis. We saw meaningful improvement in all service areas including REL. The strategic changes made over the past year to improvise transformational benchmark normalized our sales commissions across four Hackett offerings and realigned REL with a dedicated sales team are all contributing to the success of this group. Additionally, the strong demand in Europe favorably impacted our quarterly results.

Membership advisory revenue was 3.9 million, which is up 7% sequentially and 21% on a year-over-year basis. Annualized contract value for membership advisory was 15.1 million at the end of the second quarter of 2007. Up a meaningful 33% on a year-over-year basis.

Moving on to the Best Practice Solutions group. Revenues totaled 18.4 million up 8% sequentially of which approximately 2% is attributed to higher than anticipated reimbursable expenses. And down as expected from a year ago as we have now exited all Lawson and SAP staff augmentation contracts. This was a strong sequential improvement over Q1 but is not expected to be sustained over the remainder of the year as a number of available billing days decreases due to summer vacations and year-end holidays.

Now I'd like to move over to key operating statistics. Consultant head count at quarter-end was 556 compared to 563 at the end of last quarter. Annualized revenue per professional in the Hackett group was an all-time high of $402,000, compared to $345,000 in Q1 of 2007, and $387,000 in the second quarter of last year. Revenue per professional was positively impacted in the current quarter by improved rates and utilization of our business transformation consultants. Revenue per professional is calculate by dividing gross Hackett Goup revenue by the average number of consultants and subcontractors during the period.

Our new target revenue per professional for all of Hackett has now been increased to 425,000 per professional. For the Best Practice Solutions group, consultant utilization was 65%, which is up from 63% last quarter and down from 76% in Q2 last year. Our utilization target continues to be in excess of 70% for this business despite the exiting of our staff augmentation contracts. For the Best Practice Solutions group, our per-hour realized billing rate was $176 this quarter up from $171 last quarter and $156 in Q2 of last year. The year-over-year improvement was anticipated as we have now exited all low margin staff augmentation contracts. From an overall company perspective, our pro forma gross margins, which exclude stock compensation expense were 38.7% in the second quarter compared to 36.3% last quarter and 39.4% a year ago. Gross margin has increased sequentially as revenue have increased with consulting head count remaining flat. Overall gross margin is also favorably impacted by Hackett's net margin exceeding 50%.

Our pro forma SG&A as a percentage of revenues, was 32.4% in the second quarter compared to 39.6% last quarter and 30.5% in the second quarter of last year. As expected, SG&A levels decreased sequentially, driven by cost reduction efforts and the back office leverage created by increasing revenue. These decrease are expected to continue through the balance of the year.

Our cash balances including restricted cash and marketable investments were 21.5 million at the end of the second quarter compared to 24.2 million last quarter. Primary reason for the decrease in cash is due to 1.75 million spent buying back 509,000 shares of stock at an average price of $3.44 per share. In addition, the impact caused by the timing of our U.S. payroll cycle and an increase of 3.8 million in accounts receivable all partially offset by earnings in the quarter. The accounts receivable increase was cause by strong sequential revenue growth of 14% which was partially offset by a one-day improvement in our DSOs, which was 70 days for Q2. We believe we can continue to improve our DSO and have set a target of 60 days for 2008. As of the end of the second quarter, we have $4.4 million available for future purchases of common stocks.

I would now like to discuss our guidance for the third quarter. For all of Answerthink, we expect third quarter revenues to be in the range of 44 to $46 million. Diluted pro forma earnings per share in the third quarter should be in the range of $0.04 to $0.06. This pro forma estimate includes a normalized tax rate of 40%. We expect Hackett revenue to be up sequentially despite fewer available billing days in Q3 particularly in Europe. We expect Best Practice Solutions revenue to be down sequentially, partially due to the impact of fewer available billing days in Q3 driven by summer vacations. Gross margins I expected to improve sequentially, due to the increasing Hackett revenue mix and lower employer payroll taxes and no further buildup in the vacation accrual. SG&A spend should be down sequentially, despite the fact that we are holding our first ever Hackett and Best Practice Solution group's all-hands meeting in Q3. We expect our cash balance, excluding any potential stock buyback to be up during the quarter, benefiting from operating income and the timing of our U.S. payroll cycle.

Before I turn it over to Ted, I would like to mention that a while ago I expressed my desire to Ted that I would like to leave Answerthink in order to pursue my personal entrepreneurial aspirations. My resignation is effective tomorrow at which time the Company's CFO position will be assumed by Robert Ramirez, who currently serves as the Company's Corporate Controller. Robert began his career in public accounting and has been with the Company for nine years in a variety of operational and finance roles. My ten years at Answerthink have been extremely rewarding and I will continue to follow the Company as a shareholder. At this point, would I like to turn it over to Ted to cover our market outlook and strategic priorities.

Thank you, Grant. As we look at the second half of 2007, we continue to believe that the market demand for our services remains healthy. Geographically, we continue to expect slower but solid GDP growth and related business spending reflected in our U.S. demand. In Europe, we expected demand to remain at current levels, which as Grant said, have been strong across all of the market that we serve in that region. With that as a back drop, let me comment further on our 2007 strategic priorities. I'll start with revenue growth, we continue to believe that the best way to take advantage of our expanded brand permission and business model is strongly tied to the way we initially engage with a client. We understand that clients come to us for our unique ability to evaluate how efficiently they are operating their company and for our ability to bring proven Best Practices to bear in their businesses as quickly and as efficiently as possible. They strongly value that our approach is imperially based and therefore very objective. As I mentioned in my opening comments, we are seeing the impact of this focus reflected in our growth. In Europe, it is the combination of both improved demands and also our new broader relationship focus that we're using to initially engage with the client.

If we continue to improve on how best to expose our clients to the broadest leverage of our Best Practice content and tools at the onset of our relationship, whenever possible, without defaulting to a more narrow offering prematurely, we believe we will be able to ensure that we develop the broadest revenue relationship with the client and also have a good chance to establish a continuous relationship through our advisory programs. It is this outcome of broad initial relationship and continuous service through our advisory programs that we define as ultimate client success. The key is to avail the client to our IP and associates in a way that best suits their current needs but to ensure that we have not sub-optimized our opportunity to serve them as broadly as we can. This is at the heart, I believe, of the success that we are seeing in 2007.

Second item is trusted and continuous relationships. We do not want to be transaction based. We want to have continuous relationships with our clients. One of the ways we do this is by maintaining our goal to have 1,000 members and 500 clients as quickly as possible in our advisory program base. Our long-term goal is to be able to ascribe and predict an increasing percentage of our total annual revenues from our advisory program members and clients. Our clients use our advisory programs to track emerging issues and to support performance improvement initiatives that they are assessing, executing or to remain current on Best Practice changes that can drive sustainable improvements in their business.

At the end of the quarter, gross membership counts exceeding the 850 mark with clients counts now over 270. Members per clients now exceed three members per client. During the quarter, we saw increased attendance in both our U.S. and European Best Practices Conferences and other member forums. Additionally, we saw significant increases in client downloads of our research with significant interest in our globalization and talent management themes. We believe this infer that our research is becoming increasingly important to our clients as they tackle emerging business issues. Next item is to expand and leverage our empirical capital. Our organization has always been distinct because of the proprietary data that we capture through our benchmarks and Best Practices repository and tools that help our clients strive to an outcome. In addition, to our benchmark offerings we now have the ability to capture data through a series of new benchmark and data analysis tools so we can expand the number of benchmark studies that we execute during the year. We have been able to meaningful increase a number of these studies executed in the first half of this year and we expect the pace to further increase in the second half of the year.

Last quarter we mention that we are seeing our Oracle group reposition itself around our Best Practice implementation and intellectual capital. We see the alignment of our Oracle group now that's within Oracle. We expect to see an acceleration of this effort also impact our Hyperion group as well.

Last item is to expand the leverage of our India resources and team across all aspects of our business. Last quarter we expanded the resources of our Hydrobad facility by launching a new research team to support our globalization practice efforts along with increasing the resources that support our Oracle team's delivery efforts. This quarter, we saw a continuation of these efforts as well as increased contribution from our India team in the delivery of our benchmarks. As I mentioned last quarter, we are still in the early stages of fully leveraging our India resources and investment.

In summary, the changes that we've affected heading into 2007 have been favorable to our growth and profitability prospects in our business. We understand that the key will be able to maintain this momentum through the balance of the year and strongly position the organization for 2008. We think we're in a strong position to do so. As always, it is important to recognize the outstanding contribution of our associates during this strategic transformation of our entire business model. I want to thank them and recognize their outstanding effort and spirt. And to specially thank Grant for his contributions as CFO for not only helping during a very important transformation period but also for being part of the original group that helped us start Answerthink, which included his leadership of the Oracle team and the Sarbanes-Oxley team over those past ten years. For me, personally, it extends back even further since I was involved in hiring Grant when we were in our previous organization when he was graduating from college. Although Grant plans to take the rest of the summer often, he has promised Rob and I that he will be available as needed as long as we are willing to drive up to north Lauderdale to see him. Grant the organization can not thank you enough for your contribution. Let me now take it and open it up for Q&A.

Thank you. At this time, we would like to begin the question-and-answer session. (OPERATOR INSTRUCTIONS) . Our first question comes from George Sutton with Craig-Hallum. You may ask your

Hi, guys. Three questions and actually the first one, Ted, if you could just walk through, I don't know, on an anecdotal basis or just give us some evidence of how the transformational benchmark or that type of engagement is different from how you want to mark it last year, let's say.

It's pretty important. What we found out as we looked back at both our results in ''05 and '06 is that when we engage the client on a sequential basis meaning that we introduced a benchmark as just a comparative analysis tool and then introduced our transformation services after the completion of the benchmark or as the client was basically taking in or assessing all of the input we were provided from a benchmark perspective. W were actually doubling up our sales cycle and also allowing the client to actually consider alternatives when in fact the perfect alternative once we provide the client with our benchmarking results if they need any planning, any blueprinting, any consideration of the meaningful insight they provide is to naturally extend that relationship by asking a strategic consultant or advisor to consider what their next steps should be and to determine the extent of that help depending on the circumstances. We have found that that has given us a chance that by selling the product together and by making that our primary go-to-market strategy and driving our training around that, we have found that the opportunities that we're selling are expanding. We are also finding that we are executing -- we're introducing the blended offering in a very effective way. So let me tell you the secondary benefit of that introduction.

We also found out as we very reviewed 2006 and prior that when our transformation team is involved in an engagement, the client extends that relationship with us two out of three times, meaning that they go from some type of initial planning blueprinting or strategic consideration to some level of execution. So we're actually extending what is not only the initial opportunity by framing and only defaulting to one of the two sequentially if needed but we are also seeing that the natural extension of transformation from phase one to phase two is also happening as we had seen historically. So the combination of those things is having a noticeable impact. We're seeing larger relationships, more meaningful relationships with our clients. Also, we're seeing the extensions that we would anticipate seeing from our transformation office. The other key change if you remember was that in 2006, we emphasized the sale of the membership advisory program by tripling the commission of membership advisory program over the sale of the transformation offering. We simply believe that that just skewed our focus too heavily on a single offering instead of introducing the offering that most naturally introduces us to the client more strategically and most broadly. And the impact is clearly noticeable, George.

Okay. Then on REL, we talked about that being the real wild card for you. That was up sequentially can you give us a little bit more sense of what that business might look like six months from now based on the pipeline you see today?

I like to character your word of wild card as just additional opportunity for a very, very talented team.

I define it as up--

Well, let me comment. You know the other key change that we made in the middle of last year when we required REL, if you recall, George, we decided to integrate the sales team and also changed the compensation structure for that REL team. That just proved to be just a very bad idea. We unwound that decision and realigned the team with its dedicated sales team at the beginning of Q3 of last year. And I think simply put, the team has started to see success from that dedicated focus. We saw the pipeline improving as '07 started. We started to see some of those wins that we were seeing in the pipeline realized into Q2 and we're seeing that grow and continue into Q3. So we're seeing increased number of diagnostic opportunities and we're seeing those diagnostic opportunities now converting into meaningful implementation relationships which give us a very strong visibility through the balance of the year. So that team has really done a terrific job turning things around, and there's nothing or no reason to believe that that momentum can not continue.

Lastly, if we dump things down into individual years, 2005 was improving business is relatively good, 2006 was tough and a bit of a turn around, 2007 appears to be sort of the bottoming process and now we're getting better. If you kind of characterize it in generalities for late '07 and '08, what do you think things will look like?

Well, there's no doubt that the momentum we had built in 2005 some of the decisions we made on the '06 when we look at total Hackett revenue growth in '06 really were not helpful. You can characterize them as miscues. We learned quite a bit from it, we've reversed it. It's given us some pretty strong momentum. I think when you look at the guidance in Q3, we're just starting to see what the impact can be from a business that's growing that allows to you generate 50% gross margins on that net revenues. We don't see any reason why our momentum should not continue I mean, short of some very significant economic disruption, even though our offerings are tailored to help clients through cost reductions, through cash flow improvements I mean to really drive efficiency and effectiveness. So no, I think we believe that the target operating models that we put together that we envisioned for the business, we now see them within our sights. We don't see anything that should disrupt it if we continue to execute the way we have been.

Great. Grant, good luck.

Thank you, George.

Once again, if would you like to ask your question, please press star one. One moment. Mr. Fernandez, I'd now like to turn the call over to you, sir.

I guess they're going to go easy on me. It is appreciated. Let me thank everyone for participating in our second quarter earnings call. We look forward to updating everyone on our third quarter call, which we're certain will be in the latter part of October or early November. Thank you, again, for participating in our call.